Small Biz Makeover: Guayaki Tea's Big Challenge

A lot of college kids may start seeing things after a drink or two, but when David Karr saw his Cal Poly San Luis Obispo classmate Alex Pryor drinking a green infusion out of a gourd, Karr saw the future, he says. Karr credits the brew, yerba mate (prounounced "mah-tay"), popular in Pryor's native Argentina but relatively unknown in the States, for instantly relieving his allergies. "I could breathe within minutes," he says. After a few months of drinking a daily mate with Pryor, Karr ditched his own computer business to work on Pryor's venture, which sold mate as a way to encourage the native forest people of Argentina to sustainably live off their land. "Everyone thought I was completely nuts," says Karr. "But I knew it would eventually catch on."

Thirteen years later, the drink, which outsells coffee 7–1 in Argentina, is beginning to catch on in the U.S., mostly thanks to the grassroots efforts of Pryor and Karr's company, Guayakí. Karr, his brother, and another business partner crisscrossed the U.S. five times in VW vans and RVs painted to look like a rainforest to preach the wonders of the South American beverage: Natural energy without jitters! Overall vitality! Clarity of mind! [Editor's note: The FDA has not verified these claims, and studies have shown conflicting results.] They showed up at stores without appointments and passed out sample sips. Their "mate lattes," made with soy milk and honey were a hit. In Hollywood, they were even invited to serve their concoctions on a movie set.

Guayakí has every right to feel happy about the results: Revenues have been growing by 30 percent annually, and the company anticipates sales of $10 million this year. Its various products—loose-leaf tea, tea bags, energy shots, and its biggest seller, ready-to-drink bottled mate—are sold in thousands of stores, including Whole Foods and Trader Joe's, as well as supermarkets such as Kroger, Wegmans, and Vons. The company's "market restoration model" is working: By selling 180 tons of shade-grown, fair-trade, organic yerba mate, Guayakí has helped steward and restore 17,000 acres of rainforest.

Still, many Americans haven't heard of the drink. Founders Karr and Pryor, both 38, are determined to take yerba mate from the natural-food niche into the mainstream market.

Karr asks NEWSWEEK's Small Business Panel:"We are in 6,000 stores, but there are 20,000–30,000 grocery stores and 40,000 convenience stores we can still go into. But we want them to be the right doors at the right time. We've only accepted money from angels and friends and family, and from a socially responsible venture fund. We are run by a bunch of best friends—that's the most unique thing about our company. How do we capitalize our business to achieve scale without committing to an exit strategy? What are the most effective media for natural brands going into mainstream?

"For now, we dominate in natural-foods stores. But as we go mainstream, we are going in to territory with no feet on the street or dollars. And Honest Tea [owned by Coke] recently announced a yerba mate drink, which sells for less than ours. We are the first organic fair-trade mate drink, the only one with a can, but we expect it won't be long before others have a canned yerba-mate product. What are the most effective strategies for maintaining category leadership as the competition enters the scene?"

I never took financing from anyone. I never sold until I was ready to sell almost all of it. I didn't want an infusion of cash that was not from the consumer. I had to listen to the consumer. I would take cash from the business and plow it in and grow.

Paid media is expensive. We didn't do it at Burt's Bees. We did all grassroots marketing. [Burt's Bees did do paid media after the company was sold.] Guayakí should continue the grassroots campaign, which is a lot cheaper. Don't give up on that!

They need to do something to go viral, like making video for YouTube, something really memorable. People think this is tea, but they are not even sure. There's some education to be done, and it should be fun and goofy and off-the-wall. It's easy to make a clip for YouTube, and it's cheap to test it. If it works, then go to radio or TV.

Guayakí has a counterculture personality. They should go to venues that are cultish, like green festivals and rock concerts. Like Bonnaroo! People are there because they are cool and know what's happening. Guayakí is also the first. They have to make everyone else look like a copycat. Coke says it's the real thing; start a viral campaign that says, "We are the real thing." Coke will be a "me too." Start working that position now.

At Burt's Bees, we had a really clear picture of who our competitor was. We went head to head with Estée Lauder, a multibillion-dollar company, and we had that in mind all the time. It made us take an inventory of what we were good at. They had beautiful, flawless women in pages and pages and pages of beauty magazines. They were so, so, so strong! There was no way to compete at any level. So we took a hippie, bearded hermit from the north woods of Maine, who was not even that attractive, and slapped his picture on every box of skin cream we sold. Our point was that beauty was more than skin deep. There's beauty of the skin, environmental beauty, inside beauty. Estée Lauder looked a bit shallow. We looked deeper.

We turned their strengths into our strengths. "Aren't you sick of this?" we said. "Can we get real?!" Women were fed up with being compared to impossibly beautiful women and coming up short. They wanted to take care of their skin from a skin-care company as opposed to a beauty company. It resonated with people! The only way to go head to head with an international brand is to take all of their strength and use it against them so it's no longer a strength.

Seventh Generation has been around for 21 years, and we plan to stay independent and not sell our business. But we've raised tens of millions of dollars from individual shareholders with a long-term vision and understanding of our mission. There's more of that money today than there ever was before. Eleven percent of all money invested has some type of social screen on it. People are increasingly connecting their money to their own values.

Guayakí needs to invest the majority of their money in nontraditional marketing. When it comes to media, grassroots campaigns and PR will get the best return. They can grow a long way without traditional advertising. We're at $150 million [in revenue], and we've just begun to spend on traditional media.

They should do what we're doing: Do more partnerships with like-minded companies. Partnerships with others can be very effective. They must continue to foster deep relationships with retail partners. They need to tell a story in the store that is beyond what you can read on the package. Come up with an events program, which will get more off-shelf display to tell their story. Have a contest for consumers to help join you on a trip to preserve the rainforest. That will encourage retailers to give you more promotional space in the store.

Unfortunately, the more successful you are, the more you attract competition. If you're not successful, why would anyone compete with you? In the last 18 months, we have seen competition from SC Johnson, Clorox, Kimberly Clark. A multitude of corporations are entering the green household space. We were unprepared for competition. We found we were not doing an effective enough job of telling our story. But recently, we developed a competitive strategy. We now use a mission-based perspective to differentiate ourselves. We do not compete on price. We compete on values. Guayakí needs to find what level they'll compete on and market that message.

First, I have to say that I knew Seth Goldman, the founder of Honest Tea, before he started his company. It was so compelling that I invested a lot of money in the business (I had never invested in a company before), and I sat on the board. I remain very close friends with Seth. We spent hours on the conversation of an exit strategy. Seth worked really hard not to take venture money and to take the right money. Not every dollar is the same dollar.

He sought out Stonyfield Farm CEO Gary Hirshberg as an investor. Gary is a pioneer in organics, and he sold to Groupe Danone. This was a guy with money and mentorship. Seth also recruited as an investor a bottler from Coke who had started an organic soft drink. Seth had people whose values were aligned with his from the beginning. It wasn't always about "when do I get my return?" It wasn't a private equity deal. It was a passionate equity deal. That's a very inefficient way to raise money, but I think it's the way to go.

I remember when I was at Brown [University], there was a college rep for Miller beer. Guayakí should attract 500 real college-campus reps across the country who will be willing to hold house parties for this drink. They can get 500 young people who are passionate about the product and who have a point of view and get an army in motion.

Guayakí is about reforestation and environmental sustainability. Those are cool ingredients with a natural story. Now turn that into a proposition that someone at University of California, Berkeley, would be proud to be associated with. College kids are passionate about having a mission. And distribution follows college campuses. It's not a coincidence that Whole Foods started in Austin, Texas. They have to compel distribution.

When it comes to competition, it's about authenticity. Coke bought Honest Tea. Coke could have invented that in one hour, but they chose to buy it. Pepsi chose to buy SoBe. Authenticity works. Be grassroots. Be authentic. Be more authentic tomorrow than you were yesterday.

Guayakí's thesis is natural energy. Reinforce that everywhere you can. They manufacture through natural resources. They recycle at headquarters. Their presentation is a point of sale. Tell the story there. Everything that is done must reinforce the depth of their story. They can get knocked off tomorrow, but the relationship with the customers can't be replicated.

A great product serves the common good, but it's hard to make it in the main market. Even though Guayakí is in 6,000 stores, it is not enough. They are going to have distribution issues. Distribution is the hardest nut to crack with any product.

They have big dogs barking over their shoulders with Coca-Cola and Red Bull. Coca-Cola can come out with this. They'll buy 20 cans, break it down, and come out with something better. You can never be shortsighted of the big giants.

I think they should license with a Coke or a Red Bull and retain ownership. They'll gain Coca-Cola marketing dollars and distribution. Or what about someone like Andrew Weil? He's collaborating with [skin care company] Origins. They should partner with him on a Weil yerba mate drink!

Don't feel bad about a licensing agreement. Donna Karan went to [luxury products company] LVMH! A lot of big, up-and-coming designers and foodies go with bigger companies and are able to retain their identity.

Separately, I think they should move into wellness and spas. It's a very niche market, and they are very health-educated and -oriented people. This company appealed to me right away and would do well in this market.